Looking forward, vaccination will be key to support CLMV economic recovery. However, overall current inoculation rates remain low and regional herd immunity is unlikely to be achieved within 2021. According to the latest data (August 22nd, 2021), the share of fully vaccinated (2-dose) population is most advanced for Cambodia (47%) with high possibility to achieve herd immunity by early 2022. However, the fully vaccination rates remained moderate for Laos (20%) and sluggish for Myanmar (2.8%) as well as Vietnam (1.8%) (Note that latest data available for Myanmar is from June 5th, 2021). As a result, these countries may take longer to achieve herd immunity, especially given the threats of Delta variants decreasing vaccine efficacy. Given slow vaccination and worsening outbreaks throughout 3Q21, EIC expects CLMV domestic economic recovery to remain fragile and sluggish, hinging on success of curbing the spread. Apart from COVID-19 containment and vaccination, CLMV recovery will also depend on the size and effectiveness of fiscal and monetary responses, especially including stimulus programs to alleviate the impacts of current pandemic waves. Moreover, country-specific risks such as ongoing political tensions in Myanmar and debt servicing ability in Laos could further dampen growths. Key country-specific factors supporting our current CLMV economic forecasts are as follows:
- Despite still-strong exports performance, EIC projects Vietnam's economy to have a slower growth of 5.6% in 2021 (compared to previous forecast of 7%) due to impacts from the most recent 4th -wave outbreak. Unlike previous outbreaks which were timely contained, the current round has proven to be more severe and led to tight and prolonged lockdowns across all key cities. Thereby, domestic consumption and production sectors have all been largely impacted, as suggested by declining retail sales as well as industrial production index. On the bright side, Vietnam's exports continued to show remarkable growth of 26.1%YOY in the first 7 month of the year, led by manufacturing exports, especially electronics products. Further rebound in global recovery, especially Vietnam's advanced economies trade partners, has been providing supports for exports performance. Going forward, exports strength is expected to continue offsetting domestic scars from the pandemic. In addition, the Vietnamese government has recently injected another round of fiscal supports to mitigate impacts for households and businesses. Nonetheless, potential supply disruption from factory closures along with slow vaccination rates remain the major downside risks for Vietnam and should remain to be watched.
- Cambodia's economy is projected to grow moderately at 2.7% in 2021(a downward revision from 3.0% previously) owing to tighter restrictions imposed to contain the COVID-19 outbreak which should have a broad-based impact on the economy through lower domestic demand. Foreign direct investment is should be sluggish in the short term due to lower investors' confidence and extended travel restrictions. Nonetheless, recovering exports should offset some impacts of the outbreak. The country's relatively fast vaccination progress (58% of the population has received at least one dose) and adequate fiscal space for additional stimulus should also provide support for domestic demand recovery.
- Laos' economy is projected to grow 3.3% in 2021, compared to 3.5% previously, due to an extension of COVID-19 containment measures since the beginning of April. However, some measures have currently been eased as domestic COVID-19 cases have slowed compared to April, allowing mobility to continue recover better than regional peers. Growth is likely to be supported by infrastructure investments from foreign investors and resilient exports driven by external demand rebound and higher commodity prices. Nonetheless, the key risk to Laos is its vulnerable fiscal stability as the country faces a high external debt burden amid weakening Kip and low foreign reserves.
- Myanmar's economy is projected to contract a substantial -20% in FY2020/2021 (October 2020-September 2021), a downward revision from -10% previously, as a consequence of the worsening COVID-19 situation exacerbating economic impacts from the coup. The country faced back-to-back crises starting from the second wave outbreak in October 2020, the coup and civil disobedience movements since the beginning of 2021, and the latest COVID-19 outbreak starting from June to present. These crises should have direct impacts on businesses and employment. The International Labour Organization forecasted that 3.2 million (about 14% of labor force) more people are unemployed in Myanmar in the second quarter of 2021 compared to before the COVID-19 crisis. Businesses have also been impacted by weaker demand, supply chain disruptions, and rising costs as reflected by the Manufacturing PMI remaining below 50 (lower activity than the previous month) for the eleventh consecutive month to June. These factors should deepen the crises' scarring effects through lower new business registrations, weaker labor market, and worsening business' and household's balance sheets. External demand is also likely to be subdued as exports are affected by supply chain disruptions and foreign investors postpone investment plans. Many companies, particularly from the West, have canceled orders from Myanmar which impacted exports of manufactured goods. In addition, logistics disruptions at ports and border checkpoints have also pressured exports with the situation likely to worsen due to the COVID-19 resurgence. Fearing sanctions, foreign investors are likely to postpone investments in Myanmar at least until the political situation has stabilized which is likely to take some time as a return to democratic elections is unlikely to be before 2023. Key factors to be closely monitored for Myanmar's economy this year are 1) further economic and financial sanctions by major economies, 2) COVID-19 containment and vaccination progress, 3) fiscal stability risks from plummeting government revenue collection 4) severity of the political situation, and 5) financial risks from a weakening Kyat, cash shortages, and worsening credit quality.
In connection with the Thai economy, regional trade activities continued to display robust recovery. On the other hand, Thailand's investments in CLMV region have recently slowed down significantly. Looking forward, the future recovery of trade and investment will largely depend on effectiveness of regional COVID-19 containment.
- Most recent data showed that Thailand's exports to the CLMV nations largely accelerated in 2Q21 while Thailand's Direct Investment (TDI) in CLMV sharply slowed down in 1Q21. In 2Q21, Thailand's overall exports to CLMV region expanded remarkably at 42.3%YOY, compared with 0.6%YOY in 1Q21. Exports expansion has been mostly broad-based across all CLMV countries and in line with Thailand's overall growing export growth in 2Q21, largely owing to low-base effects from 2Q20. Exports to Vietnam remained the key driver after accelerating further to 44.7%YOY in 2Q21 from 12.9%YOY in 1Q21, largely led by exports of cars and components. Meanwhile, overall TDI in CLMV economies slowed down significantly to a -26.7%YOY contraction in 1Q21 after growing 24.4%YOY in 4Q20. Much of the decline could be attached to a concurrent of Thailand's 2nd wave outbreak and Vietnam's 3rd wave outbreak delaying most Thai investments in Vietnam (32% TDI share) throughout 1Q21. Furthermore, Thai investments in Myanmar, despite growing strongly through early 2020, contracted significantly further in 1Q21 amid ongoing pandemic and exacerbating political turmoil.
- From the latter half of 2021 onward, EIC expects regional trade activities to remain resilience and Thailand's investment activities to gradually rebound, but with the pace subjecting to regional pandemic outlook and country-specific risks. Across CLMV region, Thai exports and investments in Vietnam should remain the major drivers in line with Vietnam's longer-term bright economic prospects. Nonetheless, severe recent outbreaks in Vietnam and Thailand could together weigh largely on 3Q21 trade and investment momentum. In particular, the risk of regional supply chain disruption from prolonged factory closures remains to be watched. Aside from Vietnam, Thai trades and investments in Myanmar also remain subjected to a substantial risk of escalating political turmoil further depressing domestic demands.
Source: Siam Commercial Bank